Carolyn Feibel reports at the Chronicle’s Politics blog, that the city quietly added $60 million to its debt obligation last Friday, in order to pay its obligations on HPD pensions. Amazingly, this was reported as if it were good news.

The city refinanced a portion of its pension obligation – $400 million of it, to be exact. Previously, the city had issued a $300 million promissory note to the Municipal Employees Pension System in 2004, using the Hilton Americas-Houston as collateral. That lowered the unfunded liability left over from the Brown administration. On paper, that is. But the White administration deferred both payments and interest, so the eventual obligation grew to $341 million.

Now, the city has refinanced that old obligation, and paid off the $341 million owed to the municipal pension fund. The old obligation would have cost 8.5 percent interest if the city had stuck with it. The new bond issued Wednesday is worth $400 million, with a 6.29 percent interest rate. The extra millions will be used to pump cash into the police pension, as well.

This article is pitched as good news, but what it really says is that the Cits just borrowed an additional $59 million to finance the police pension fund and $41 million just to pay the deferred interest on the previous $300 million debt. The last sentence of the quote makes it obvious that the first sentence is misleading. Worse, the math doesn’t add up. Here’s what happened, if we cut out all the smoke and mirrors.

Several years ago, the City of Houston couldn’t pay its pension obligations. So Mayor White agreed, that in lieu of the cash it was supposed to pay, the city would hand over a lien (not actual ownership stake, just a lien) on the city’s ownership of the Hilton Americas. (We won’t raise the side issue of what the city is doing in the hotel business in the first place.) Now it’s the job of the pension fund to take the city’s contribution and invest them to make more money to pay the pension obligations when employees retire. Since the city was handing over a piece of paper, not actual money, there was nothing for the pension to invest. So the city had to pay interest on this $300 million, at 8.5% (first I’ve heard of it, but ok….) So all these years, while we spoke of the city’s $300 million IOU to the pension, it was quietly growing, like a cancer.

Friday, they gave the cancer two aspirin, and told the patient to call back in 2032. They borrowed $341 million to pay off the IOU and the accumulated interest. Was this done to save the city money? No.

The debt rollover also releases the need to use the hotel as collateral. City officials hope that will make it easier to sell. The city has been trying to sell the hotel since September.

Clearly, it was done so the city could sell its interest in the hotel and Mayor White could obligate taxpayer money to build a second one, when the first is limping along at 60% occupancy. One hopes no one would be that stupid, to buy a business that White has announced the city will undercut (using more taxpayer money) but since any such buyer is likely also line up for a taxpayer bailout in the event of losing their subsidized shirt, I have my doubts.

Furthermore, the amount as given cannot be correct. (Warning: simple math ahead!) The hotel lien trick was pulled in 2004. At 8.5%, compounded annually, that would amount to an obligation of $415.76 million in 2008, four years later. Even at a straight 8.5 per year, not compounded, that would equal $402 million by this year. An increase from $300 million to $341 million equals barely over 13% appreciation in four years. This works out to an annually compounded rate of 3.25% or a straight interest rate of 3.31%. So there is a huge discrepancy in the figures that the Chronicle is reporting. The city claims to have lowered its interest rate from 8.5% to 6.29%, and calls this a “rollover” of its debt, but the truth this:

• While the city had a debt of $300+ million, it hadn’t actually borrowed any money, it was just a promissory note “on paper.” Now the city actually owes a lender the money. (In other words, we went from accounting tricks to a real debt.)
• Even if you accept 8.5% figure, we’re now paying 6.29% on $100 million extra. The rate may be 2% less, but the actual $$$ obligation is not.

It gets worse. The city says the civilian pension obligation was now $341 million, but they actually borrowed $400 million. The extra $59 million went into the police pension fund. So now we’re funding both pension obligations by borrowing money, and we’re paying a lower interest rate, but on a higher base amount — assuming the interest rates are true, which is doubtful. What this means is that the city is paying nearly as much in interest:

Simple 8.5% interest on $300 million = $25.5 million.
Simple 6.29% interest on $400 million = $25.16 million

The move will save taxpayers $7.5 million annually until 2014, Controller Annise Parker said. “We were paying 8.5 percent interest. Now we’ll be paying 6.29 percent, for an overall savings of more than 2 percent,” she said. The city will also pay off the pension debt two years earlier than planned, in 2032.

Huh?

As you can see, the figure is wildly incorrect. There is no 2% savings to the taxpayer, nor $7.5 million annually. And why the cut off of the savings in 2014? The only thing I can think of is that the terms as reported are simplified. The interest rate is actually lower to start, and set to become much higher in six years. What is the total savings over the length of the note, if any?

Then there’s always the whole thing of financing CURRENT pension contributions by borrowing money that has to be paid back in the FUTURE, when we are ALSO facing the obligated contributions for those future years.

If the city continues to finance its pension obligations every year by borrowing money, at some point it won’t be able to pay for the the deferred obligations from the past and the current obligations it has to meet. Therefore, the continued debt funding of the municipal pension is a time-bomb that will take down the entire city’s financial structure if it continues.